Businesses have fixed costs and variable costs. Fixed costs are expenses that remain constant, such as rent or lease. Variable costs vary based on business activity. For example, the cost of labour would increase when production increases in a manufacturing firm, and decrease when production decreases. Calculating the cost per unit helps a business analyse where costs can be streamlined.
Determine the total number of units produced. For example, a manufacturing firm may produce 1,000 toys.
Add all of the variable costs together, such as raw materials, labour and packaging.
Calculate the variable cost per unit by dividing the total variable cost by the number of units.